Rewriting the Rules for Financial Trading Infrastructure: Integrating the Back Office Into the Front Office

John Knuff

 

By John Knuff (Part 7 in an 8-part series)

New Rules

  • Competitive component outsourcing
  • Community = know how + resources

As the world speeds up and space morphs increasingly into time, investment firms need to gear up their back office as well as their front office:

  • Back office inefficiencies can mean uncompetitive front office pricing, higher operational costs for clients and lost revenues
  • Back office ex post batch processes like margin calls, compliance checks or corporate actions have become ex ante input parameters into real-time trading decisions
  • Back office strategies like component business process outsourcing (BPO) are also becoming familiar as real-time distributed trading
  • Back office issues like change management and back-testing need to be fully integrated into front office skill sets, as innovation becomes pervasive and strategies need to respond toconstantly changing market regimes


 
As one prop trader put it, “The faster we get, the more we focus on safety and risk management. So we have a whole set of algos focused on risk and controlling P&L, imposing position limits and transaction rules and calculating other risk-metrics. Every trading engine sends copies of orders, executed trades or other signals to the control instance. We monitor the global position centrally, but then allocate capacity out in real-time to each trading engine.”

Regulators have also come to the same conclusion as illustrated by the SEC’s latest market access rules for broker-dealers. Soon if you cannot control it, cross product, cross-market and pre-trade, you will just not trade it. The risks are becoming so great.

Even change management is changing.

As another Swiss hedge fund observed, “As markets accelerate and more participants trade faster, conditions change. Back testing with last year’s data may no longer be relevant.” Few processes will survive unscathed in the demanding world of M2M 2.0.

If traders are to get smarter as well as faster, they need to co-opt partners that can share costs and the risks of pioneering, while contributing real knowledge, experience and pooled assets.

All of the partners then interoperate in real-time as a set of collaborating e-services to achieve each trading firm’s objectives. Many people describe this emerging reality as SaaS or cloud computing.

However, the scalable, colocated e-services of distributed trading give a new meaning to these terms.

By leveraging colocated multi-partner resources, traders can manage the scale and diversity of global markets, while their firms gain real agility.
 

Coming up in part 8: Enabling M2M 2.0 – The Next Generation

Supply chain processes are now data driven, distributed, and collaborative. There is no going back.
 

About Equinix in the Global Financial Markets

Equinix, Inc. (NASDAQ: EQIX) provides global data center services that ensure the vitality of machine-to-machine e-commerce. Some 400+ buy- and sell-side firms have come to value the agility that our network-rich International Business Exchange™ (IBX®) data centers now provide by operating across 38 markets in 12 countries on five continents, including all of the world’s top financial centers. From New York to London or from São Paulo to Singapore, Platform Equinix contains the world’s most robust and mature financial ecosystem with 99.9999% uptime.

Our community includes 60+ innovative trading platforms like Chi-X, EBS, SIX Swiss Exchange, Deutsche Börse and Bloomberg, 150+ financial e-services providers and 680+ networks. These networks in turn link through to thousands of other firms or markets to form a global ecosystem offering fast scalability and customized service across today’s diverse and uncertain global financial system.

 

Learn more at: www.equinix.com/industries/financial-exchange/